Thursday, March 27, 2014

Can the law promote doing the right thing?

Yesterday, the Swiss federal government published a report addressing the responsibilities of companies. The crux of the report is the question of whether the legislator should declare the non-binding global ethics standards as binding for Swiss companies. Here, opinions differ along the well-known lines: On the one hand the voices of business-critical NGOs, which are using every means to gain attention for what they consider right; on the other hand business-friendly representatives for whom any regulation is one too many. I don’t plan to join in their mantra of voluntariness, business’ ability to restrain itself. However, I ask myself to what extent more regulations actually enhance a sense of responsibility in companies. Can the law promote doing the right thing? The so-called fat-cat-initiative that passed last year and going to be a paragraph in the federal constitution provides illustrative material for this – as far as the consequences can already be estimated. 
The fat-cat-initiative has promised to limit the compensation of top management. It stated that the bonuses have gotten out of hand; some commentators even saw the social glue at risk. The initiative sought to remedy the problem by a juridification of what’s “right”. New procedural rules should leverage the right thing, i.e. a socially acceptable compensation practice. 

However, at the present time there has been another breakthrough: As a direct result of the initiative the demand for the so-called directors and officers liability (D&O) insurance went through the roof. It protects personal assets of board members against vulnerabilities from derivative suits. This can be seen as an indicator showing that the actions of those responsible are indeed more oriented towards legality. However, it can also be seen as safeguarding of those in charge mainly driven by fear of responsibility. 

The newest compensation reports now circulating in the media to be presented to the shareholders imply that the right thing probably won’t be implemented through these new regulations. To some extent, taking on responsibility has become more of an exercise in compliance. Thus, purely economic arguments support the invariably inflated management compensations. “We need to pay competitive salaries to compete in the war for talents!”, is stated by the people responsible for it, thereby willfully ignoring the fact that the sovereign has called for socially fair salaries.

In my opinion, the juridification of doing the right thing only reinforces what stakeholder theory has called the “separation fallacy”: The detachment of economic activity from our everyday lives. “Morality” still applies to everyday life; in business, however, only its apparent laws of merciless competition count.

To sum up, the law cannot enforce doing the right thing. The law exempts from personal commitment. The law only forwards a pressure to legitimize, which in turn even reinforces a purely economic logic in the business world. In contrast, the right thing has its roots in internalized values, not in imposed rules of behavior. So instead of more directives that fail in prescribing what’s right, we need more stories that tell the right thing. Particularly at these venues where the leaders of tomorrow are listening.

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